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Roseman: 1M Americans here face tax clampdown

Anita moved to Canada from the United States in the 1960s. Now a dual citizen, she files tax returns with the Canada Revenue Agency and never files with the U.S. Internal Revenue Service.

She learned only recently that filing U.S. tax forms was a legal requirement.

Pedestrians walk past the U.S. National Debt Clock in New York. Americans living in Canada face a tax clampdown. (BRENDAN MCDERMID / REUTERS)

“My common law partner always does my taxes. I don’t remember ever using a tax accountant or being told by anyone to file a U.S. tax return,” says Anita (not her real name).

Recently, she was upset to hear the U.S. was going after dual citizens and imposing tax on savings already taxed in Canada. She asked me about renouncing her U.S. citizenship to avoid this tax grab.

Of about one million U.S. citizens living in Canada, few file U.S. taxes or even know of their obligations, according to tax experts I consulted.

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“The U.S. is the only country that requires tax filing based on citizenship, not residence,” says Jamie Golombek, tax and estate planning director with CIBC Private Wealth Management.

This summer, the U.S. government encouraged citizens to disclose their foreign income and assets on a voluntary basis. Those who did so had to pay a tax penalty of at least five per cent of what they reported.

“But this voluntary disclosure initiative caused people enormous panic. There’s a lot of hearsay, rumour and lack of facts out there.”

The U.S. effort to make citizens come clean ended on Sept. 9. It was aimed at wealthy people hiding money offshore, such as in Swiss bank accounts.

Canada has a tax treaty with the United States, which gives tax credits to offset the tax paid on Canadian income. And since Canadian taxes are higher than U.S. taxes, dual citizens likely have nothing extra to pay.

So, what should U.S. citizens do if they haven’t filed U.S. tax returns?

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Get up to date, says Smith. Do it quickly. But you don’t have to go back to the time you moved to Canada.

“The IRS requires filing the last six years of returns to enter the system. We advise clients to do that and write a note explaining why they haven’t filed U.S. taxes in the past. To date, no one has been assessed a penalty.”

An even bigger issue is a requirement for U.S. citizens to report their assets held in Canadian bank accounts.

Imposed in the early 1970s, the disclosure requirement known as FBAR (Report of Foreign Banks and Financial Accounts) is enforced strictly by the Internal Revenue Service. It can come with big penalties for nonfiling.

David Christianson, a certified financial planner in Winnipeg, advises clients to submit just three years’ worth of tax and bank asset forms to the IRS.

“We’ve had many clients who were rehabilitated in just three years, as long as they gave enough detail to flesh out their status and show they didn’t owe any taxes,” he says. “So far, no one has been charged any penalties.”

Does it help to renounce your U.S. citizenship? Not really, experts say.

“It’s a Catch-22, since you must be tax compliant for the past five years,” says Michael Serbinski, a Canadian-born accountant with a practice in Chicago and Toronto.

“Why give up your U.S. citizenship in order to save $300 to $400 a year to file returns? That’s what it boils down to.”

However, reporting foreign bank assets is becoming more arduous. By 2014, Canadian banks will have to tell the IRS about clients’ holdings.

“The U.S. is introducing new FBAR forms that are 10 times as complicated and will cost clients a lot more,” says Christianson.

Once up to date, U.S. citizens must prepare to file forms every year from now on. That’s a factor in deciding whether to hang on to dual citizen status or just let it go.

Ellen Roseman writes about personal finance and consumer issues. You can reach her at eroseman@thestar.ca.

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